Corps Flashcards
Duties of controlling shareholders
The MBCA does not specify the duties of controlling shareholders to a controlled corporation or its minority shareholders. Instead, the duties of controlling shareholders generally arise as a matter of the court’s “inherent equity power” to fashion fiduciary duties owed by majority shareholders to minority shareholders.
Generally, courts have examined business dealings between a controlling shareholder (such as a parent corporation) and the controlled corporation using a fairness test.But when the transaction does not involve self dealing (as is the case with respect to dividends payable to all shareholders of the controlled corporation), then the “business judgment” standard applies.
Business opportunities within a corporate group
For business opportunities allocated within a corporate group, courts have accepted that the parent should have some leeway in allocating business opportunities within the group.
Shareholder right to inspect board minutes and accounting records
A shareholder, whether of record or who beneficially owns her shares, has a right to inspect minutes of board meetings and “accounting records” for a proper purpose. A proper purpose is a purpose reasonably related to a person’s interest as a shareholder, “such as a desire . . . to determine whether improper transactions have occurred.”
A shareholder seeking inspection of corporate documents must offer credible evidence that there was mismanagement or other improper conduct.
Under the MBCA, the shareholder’s right to inspect corporate documents relevant to the alleged bribery is subject to certain limitations.
Launching derivative claims
The MBCA defines a “derivative proceeding” as one brought “in the right of a domestic corporation.”
The MBCA generally requires that shareholders make a demand on the board of directors before initiation of a derivative suit.
A derivative suit is essentially two suits in one, where the plaintiff-shareholder seeks to bring on behalf of the corporation a claim that vindicates corporate rights, usually based on violation of fiduciary duties.
LLCs and member management
When the certificate of organization fails to specify whether the LLC is member-managed or manager-managed, the LLC is presumed to be member-managed, unless the members’ operating agreement specifies how the LLC is to be managed
Under RULLCA, “each member [in a member-managed LLC] has equal rights in the management and conduct of the company’s activities.” Thus, consistent with general agency law principles and with the approach of other acts governing LLCs, each member of a member-managed LLC can bind the company to contracts for apparently carrying on the ordinary business of the company unless the member lacks authority to do so and the other party to the contract has notice that the member lacks such authority.
Dismissal of shareholder derivative claims
Under the MBCA, the board can seek dismissal of the shareholder’s derivative action if a majority of the board’s “qualified directors”—those directors who do not have a material interest in th e derivative action—determine in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that continuance would be contrary to the corporation’s best interests.
Director liability
A director is liable to the corporation for the director’s decisions or failures to take action that were “not in good faith.”
Courts applying the duty of good faith have made clear that corporate directors cannot consciously violate—or permit the corporation to violate—legal norms, even when such violations may be profitable to the corporation
In addition, the duty to act in good faith requires corporate directors to establish procedures to ensure the corporation’s compliance with legal norms. Thus, courts have required corporate directors to establish “[corporate] information and reporting systems” that provide “timely, accurate information . . . concerning both the corporation’s compliance with law and its business performance.”
The “good faith” standard requires that directors, among other things, not approve (or condone) wrongful or illegal activity.
Director’s duty of good faith and fair dealing
The directors have the burden to show that the transaction as a whole was fair in terms of “fair price” and “fair dealing.” This means courts will inquire into (1) whether the transaction price was comparable to what might have been obtained in an arm’s-length transaction, given the consideration received by the corporation, and (2) whether the process followed by the directors in reaching their decision was appropriate.
Director’s duty of care
Under the MBCA, a director is called on to exercise “the care that a person in a like position would reasonably believe appropriate under similar circumstances” in “becoming informed in connection with their decision-making function.”
Normally, “the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one.”
Directors and conflicting interest transactions
The MBCA defines a “director’s conflicting interest transaction” as one effected by the corporation “respecting which . . . the director had knowledge and a material financial interest.” MBCA § 8.60(1)(ii).
In a jurisdiction with an “interested director” statute, the sale of the tower would qualify as a “director’s conflicting interest transaction” given that it was a transaction with the corporation and one in which the directors had a direct or indirect interest.
A “director’s conflicting interest transaction” (that is, a director self-dealing transaction) is not absolutely prohibited. Instead, modern corporate law permits such transactions—with the consequence that the business judgment rule applies if, after full disclosure of all relevant facts, qualified directors authorized the transaction. If, however, the self-dealing transaction is not shown to have been properly authorized, the business judgment rule does not apply and the transaction must be shown to have been fair to the corporation
Business Judgment Rule
The business judgment rule does not protect decisions by directors not acting in good faith.
In basic principle, a board of directors enjoys a presumption of sound business judgment . . . that, in making a business decision, directors act in good faith, on an informed basis, and in the honest belief that the action taken is in the best interests of the corporation. Specifically, the business judgment rule, while normally protecting the honest business judgment of directors, does not apply upon a showing of “illegality.”
ee Shlensky v. Wrigley, 237 N.E.2d 776, 778 (Ill. App. Ct. 1968) (business judgment rule applies “unless there is a showing of fraud, illegality, or conflict of interest”).
Directors breach their fiduciary duties—and the business judgment rule provides no protection— when they approve illegal business operations (or refuse to investigate alleged illegal business activities), even though the illegal business may be profitable to the corporation.
Incorporation of corporations
Normally, the existence of a corporation begins with the filing of the articles of incorporation. MBCA § 2.03(a) (“Unless a delayed effective date is specified, the corporate existence begins when the articles of incorporation are filed”).
Failure to properly incorporate
Under the MBCA, “persons purporting to act as or on behalf of a corporation, knowing there was no incorporation . . ., are jointly and severally liable for all liabilities created while so acting.”
Under the common law, courts have inferred corporate limited liability in cases of defective incorporation in two situations. First, under the “de facto corporation” doctrine, courts recognize corporate limited liability when there was (1) a colorable, good-faith attempt to incorporate and (2) actual use of the corporate form, such as by carrying on the business as a corporation or contracting in the corporate name
Under the “incorporation by estoppel” doctrine, most jurisdictions recognize corporate limited liability when a third party deals solely with the “corporation” and has not relied on the personal assets of the promoter.
Governance of the internal affairs of the corporation
Internal affairs of the corporation, such as the conduct of shareholder meetings and election of directors, are subject to the corporate law of the state of incorporation.
Under the MBCA, “shareholders may amend . . . the corporation’s bylaws.”
The MBCA states that the bylaws “may contain any provision that is not inconsistent with law or the articles of incorporation.”
The inclusion of director-nomination procedures in the bylaws is consistent with practice and is recognized by the Delaware courts, whose views on corporate law carry significant weight. Typically, the procedures for nomination of directors are found in the bylaws.
Under the MBCA, shareholders have the power to amend the bylaws. The board shares this power with the shareholders, unless (1) the corporation’s articles “reserve that power exclusively to the shareholders” or (2) “the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw.”
